An Economic Analysis of Protect Certificates - An Option-Pricing Approach

We introduce and describe a new financial product referred to as Protect Certificates and show that the payoff of a Protect Certificate can be duplicated by the combination of a zero coupon bond, call options on the underlying asset and put options on the underlying asset. We develop pricing models for several variations of Protect Certificates and show that issuers receive considerable profit at primary market issuance. We compare the issuers’ profit from Protect Certificates to two other types of structured products, Outperformance Certificates and Bonus Certificates, and find that issuers earn statistically and economically higher profits from the issuance of Protect Certificates. We conclude that buyers highly value the capital protection offered by Protect Certificates, but tend to overpay for this protection.